Board Oversight in Unprofitable Ventures

[00:00:00] In today's episode, Richard Conway interviews Phil Morle, chair of V2food, Samsara Eco, Eden Brew, and Nourish Ingredients about how boards can approach their governance role in unprofitable startups.

[00:00:14] Richard Conway: Welcome to Minutes by boardcycle. I'm your host, Richard Conway, and today my guest on the podcast is Phil Morle.

[00:00:21] Richard Conway: Phil is the chair of a number of deep tech startups, including Samsara Eco, V2food, Nourish Ingredients, and Eden Brew. And he is also a partner at Main Sequence Ventures, the venture capital firm founded by the CSIRO.

[00:00:35] Richard Conway: Welcome, Phil.

[00:00:36] Phil Morle: Hello, good to be here.

[00:00:37] Richard Conway: So Phil, many of the companies you chair, so from Eden Brew with its dairy alternatives to Samsara with its recycling technology. They're developing breakthrough innovations which require really substantial investment before there was any path to profitability that becomes clear.

[00:00:56] Richard Conway: So I wanted to ask you to open up how do governance for companies being unprofitable is a fact or perhaps even a strategy for a really long period of time.

[00:01:12] Phil Morle: Yeah, this is my world. We call these companies "binary companies," which in other words, they're not like a typical software company where you get to revenue fairly quickly and it slowly increases over time as you market and expand the software. The deeper the tech, the richer the science, it's probably making no money for quite a long time. Could be three years, could be four years, then it's making a lot of money. It just literally turns on.

[00:01:43] Phil Morle: And so the job of the board is to navigate the pathway to the revenue turning on, and as well, just to force some revenue that comes sooner through commercial pilots and things like that that we might do.

[00:01:56] Phil Morle: So, if I just walk through a little bit about the last few years of experience here: three or four years ago, Venture Capital was bubbly enough, shall we say, to allow for these kind of science driven companies to be unprofitable or non-commercial for quite a long time, whilst they went quite deep on the science to build out the platform.

[00:02:17] Phil Morle: And, you may get to the point where companies are raising four or five or six rounds of capital, each one bigger by some margin, before the first commercial dollar sort of flows in. I will say that today, that is not happening.

[00:02:35] Phil Morle: And so, as a director on a one of these sides driven boards, from the first day, my question is: what is our commercial activity, and how are we building towards sustainability?

[00:02:50] Phil Morle: I think if we manifest this as a, some materials in a board pack, a couple of slides which we often have in our packs. One, of course, is the burn-down chart, which shows the cash flow burning away. And I like to have a visual in my board packs which basically says: " here's the chart over time, here's the cash burning out of the business. We run outta money in June 2026," or something like that.

[00:03:16] Phil Morle: And at the last board meeting, it was here, which was August 2026. And then, on that slide it says: "Here's what changed this month," so that we know what's going on. Because I think so much of managing these companies on the board level at this stage before the revenue's flowing, is just all about maximising what you can get done, what value you can create, whilst that cache is burning down outta the business.

[00:03:48] Phil Morle: The second slide that we have developed and it's served us well at Main Sequence Ventures on with our companies, is we talk about the "slam dunk financing."

[00:04:00] Richard Conway: Yes.

[00:04:00] Phil Morle: And that's the financing which comes at the end of that burn-down, right? What we're trying to describe in this slam dunk financing slide is: what are the things we are gonna deliver as a company, and if we deliver those things, what do we believe will happen because of that?

[00:04:20] Phil Morle: So, if we've got this many customers, if the science is now showing this kind of value, do we believe we can raise money? If so, at what valuation? How much could we raise? Is that enough to do what we need to do next?

[00:04:36] Phil Morle: It's a very powerful mindset for prioritising. Because again, all companies have this challenge where it's easy to see shiny objects in between board meetings and go and develop some of those things and use resources for those things. But just spend two extra months doing that, which you don't have because that's just increased the chances of being not quite there at exactly the moment where you need to convince other people to refinance the business.

[00:05:10] Phil Morle: And so, managing the cash burn to performance of company is the obsession on all of these boards that we need to spend a lot of time on.

[00:05:21] Phil Morle: Another conversation we have a lot in these companies is pioneered by one of our CEOs, actually, who announces, as a metric to his company, what the daily burn rate is.

[00:05:35] Phil Morle: At the time when the CEO told me about this story, the burn rate of the company was $100,000 a day.

[00:05:41] Phil Morle: So this whole concept of a $100k day burning away outta the business, regardless of what you do. 'Because remember: you've hired a workforce, you've got people. The team. You might have a hundred people just coming to work every day doing work. Regardless of what they get done, they're in a building that you've gotta pay rent for. You've gotta pay the salaries. There are these fixed costs, which are just relentlessly burning down the capital that's in the company today.

[00:06:09] Phil Morle: And that became a really interesting conversation, for example, in the culture between the different teams in the company.

[00:06:16] Phil Morle: Because, as an example, you might have a engineer who has a job on the critical path to buy a certain piece of equipment. And because they're an engineer, they want to do a very thorough job. You want to save as much money. They wanna buy the best thing. They wanna do a proper analysis of everything that's in the market and make a big spreadsheet and be able to give you all the answers.

[00:06:39] Phil Morle: But they might be taking weeks to do that, and they might, as a result of it, save $3,000 versus something they could have decided a couple of weeks ago. In terms of their work, that's great. They've been frugal, they've saved money, they've been very effective with their use of capital.

[00:06:56] Phil Morle: But in the meantime, the company burned $100k a day for two or three weeks. And so, that's problem.

[00:07:03] Phil Morle: So, coming back to the burn-down chart, that is the critical thing.

[00:07:06] Phil Morle: Value created to time used, is the most important metric that these teams concentrate on.

[00:07:15] Richard Conway: Yep. And so Phil, I wanted to ask a little bit more about how you use the slam dunk financing concept.

[00:07:22] Richard Conway: So I guess just to play back to you a little bit of what I heard there, your closely monitoring, burn rate, and therefore have a good idea of what your runway is it any kind of given time.

[00:07:32] Richard Conway: And then you have your slam dunk financing, which I understand to sort of set out what you would have to believe, at a point in time before your runway ends in order to think that an investor will come in and recapitalise the company.

[00:07:48] Richard Conway: Is that, broadly speaking, the way to think about it?

[00:07:50] Phil Morle: That's right. A way to think about it is: let's say we're at the start of this period. The company's just been refinanced. You've got all these jobs that you're gonna try and get done. That's the point to the pitch deck for what you're going to be talking about in 18 months.

[00:08:07] Phil Morle: That's the end state of the slam dunk financing. This is the company that doesn't exist yet, but it must exist in 18 months. What are the metrics? Who's gonna be on the team?

[00:08:17] Phil Morle: We'll have quarters in the columns, and then the horizontal swim lanes. Revenue and finance, performance team, product utility, and you go through each of these stages.

[00:08:30] Phil Morle: And then think about: what's the announcement? What's the announceable thing to investors or to the public that you'll say you've achieved? You know, "We've just hired, the ex-head of research at BASF as our Head of Science. You know, "We have just hit a certain performance with the production of our product."

[00:08:51] Phil Morle: So, what's the story you're gonna tell over the years? And then, making sure that happens.

[00:08:55] Phil Morle: And we spend a lot of time as well, validating that with other investors, 'cause as an investor who's also the chairman or the director of a number of these companies, we just can't fund all of the funding that the companies need. So we are always building in this coalition of people that can help.

[00:09:12] Phil Morle: We find it very valuable to, early on, at the beginning of that phase to go and speak to those investors and say: "Hey, we think we'll be coming back to market in 18 months, and here's the company we're gonna be talking about. What's missing?"

[00:09:27] Phil Morle: And then they can say, "Well, I'd be really worried 'cause you don't have these things," or, " I'd really wanna see a lot more customer proof than that," or whatever it is. And then we know, we know with 18 months' notice what we've got to do, and we can take that back to the plan.

[00:09:42] Richard Conway: Yep. And so, are you then also using, I guess, those KPIs you develop as part of that process to judge whether to persist, whether you need to pivot, whether you need to wind down? Because I guess those are things that can really happen in these kinds of companies, right?

[00:09:59] Phil Morle: Yeah, that's right. They absolutely become the KPIs for the board to track. There's always a slide in all our board packs, which has got the slam dunk financing metrics that we need to deliver, and how we're tracking along that journey.

[00:10:13] Phil Morle: I think that the confronting one that you asked there was, "Should we even exist" right? Have we hit the numbers to say that we should be a company that is out there doing what we say it's gonna be doing?

[00:10:27] Phil Morle: I always find that very positive, actually. In some companies in the past, I've had a half yearly "end-of-the-line" meeting, regularly every six months where we say:

[00:10:36] Phil Morle: Are we making the company that customers want?

[00:10:39] Phil Morle: Rather than just persisting with something which is never going to work.

[00:10:43] Phil Morle: And I think having that kind of discipline also brings an agency into the team. There's a sort of freedom around it. Let's just habitually look coldly and objectively at how it's going, and say: should we continue? Or should we change?

[00:10:57] Phil Morle: And I think that's the other thing as well. What is always the case in all of these companies is: the world is in flux to the extent that it might look entirely different after 12 months of operations. And I think a board needs to be able to have the elasticity that it needs to have to make decisions around that.

[00:11:24] Phil Morle: So, let's say we've got four metrics that we're tracking to every board meeting. What of course happens there is you are creating a rhythm for the board. You're creating neural pathways in the director's mind going, "Okay, how's this going? How's this going? How's this going?"

[00:11:39] Phil Morle: But after 12 months, there may be four wrong things to measure. Because, you've just had a moment where you've properly reflected on it.

[00:11:48] Phil Morle: We're going down the wrong path because. These things are not coming to life in the way that we thought. Whereas over here, there's something really interesting happening. Like we've found another way. We've found a cheaper way, we've found a different market to operate in. We've found a different kind of customer that we didn't even know existed before.

[00:12:06] Phil Morle: Then it comes back to the board saying, What should we do? Do we need to re-look at our metrics and change them?

[00:12:13] Phil Morle: But obviously we don't wanna do that recklessly or casually, because otherwise we're just gonna be bouncing all over the place instead of moving forward. But I think it's important to sort of have that openness and that elasticity as a board to be able to do that.

[00:12:29] Richard Conway: Yeah. And so Phil, as a last question on this one, I wanted to pick up on that a bit more. I guess the situation you've described here for a board is: you're the director of the company that is not necessarily "default alive," I guess, is the term that's often used.

[00:12:44] Richard Conway: Like, it will only continue to exist if you can convince investors to continue investing in the future. In an inherently uncertain state.

[00:12:53] Richard Conway: And what kind of is elasticity the key thing you're looking for, for directors on the board in that scenario? How does a board of this kind of company need to look different to a traditional business?

[00:13:05] Phil Morle: I think the big one is: you need to be as proactive and imaginative as you can, acknowledging that the company at this point in time is doing something that's impossible, in a way.

[00:13:23] Phil Morle: These startups, they're coming into a world where there's probably no market yet. It's a whole new area. Certainly the product is a brand new innovation, and all kinds of things are going to go wrong. It's just that the normal world, and it's going to be really hard, and there's gonna be frequent board meetings where bad news is on the table, and we need to sort of explore that.

[00:13:48] Phil Morle: So I think this culture again, which is: How do we have the psychological safety in the boardroom so that even though we have the discipline to just sort of make sure , we're properly governing the business, we're not just punishing the management every single meeting 'cause they're not hitting the targets?

[00:14:06] Phil Morle: Cause that's just gonna happen a lot. That's it, nature. Where things are gonna change.

[00:14:11] Phil Morle: Certainly, there's an elasticity point where we need to be able to flex, and not just sort of stamp our feet in board meetings.

[00:14:18] Phil Morle: But the one big area is: it's just to ask, How can I help?

[00:14:22] Phil Morle: And to really listen for those things, to be really tuned to it.

[00:14:25] Phil Morle: You know, again, there's a fine line here between we're not there to do management's job for them, to tell them what to do, to be smarter than them. But if we're coming from a place where we can help, where we know people, where we can invest money, in my case. We need to have that conversation and be as proactive as we can, sort of figure out how we're gonna get there.

[00:14:48] Phil Morle: 'Cause we're all going to need to push this business over the hill many, many times.

[00:14:52] Phil Morle: You can't be passively just looking at metrics, asking questions, and then putting it back to the company to go do the real work. I think we've all gotta get into the swamp and get dirty together.